The federal government’s lowering of the consumer carbon tax rate to zero will temporarily reduce Canada’s inflation rate by around 30 percent, according to the Bank of Canada.
The removal of the federal fuel charge will pull down Consumer Price Index (CPI) inflation by 0.7 points from April 2025 to March 2026, according to the Monetary Policy Report released on April 16. Canada’s inflation rate was at 2.3 percent in March.
The Bank of Canada said that since the carbon tax came into effect, it has added 0.1 to 0.15 percent to the inflation rate for consumer prices each year. It said the removal of the tax will lower inflation primarily due to lower gasoline prices, as the tax has added around 18 cents per litre to fuel prices since it was introduced.
The Bank said the decline in inflation will also be temporary, at 0.7 percentage points lower for around one year, mostly reflecting the decline in gasoline prices.
Immediately after he became prime minister on March 14, Liberal Leader Mark Carney passed an Order in Council that reduced the federal fuel charge to zero. Carney has been a strong advocate of carbon taxes, but had pledged during the Liberal leadership campaign to remove it, saying it had become “too divisive.” He accused the Tories of having misinformed Canadians about the fuel charge.
Carney said he would replace the carbon tax with a system that rewards Canadians for making greener choices like buying electric vehicles, heat pumps, and energy-efficient appliances, while making “big polluters pay” for those incentives through a new consumer carbon credit market.
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The carbon tax came into effect in 2019 at $20 per tonne, and was set to slowly increase until reaching $170 per tonne in 2030, as a way of incentivizing Canadians and businesses to transition to greener forms of energy and lower carbon emissions.
In October 2023, Bank of Canada Governor Tiff Macklem said that getting rid of the carbon tax would allow inflation to drop by 16 percent with the inflation rate at that time being 3.8 percent.
“That would create a one-time drop in inflation of 0.6 percentage points,” Macklem said when testifying before the House of Commons finance committee, adding that increased government spending was making it harder to bring down inflation.
The Conservative Party has long been critical of the Liberal government’s carbon tax, and argued it was increasing the costs of food, fuel, and home heating while Canadians were going through a cost-of-living crisis.
Conservative Leader Pierre Poilievre has said a Tory government would remove both the consumer and industrial carbon tax and use “technology, not taxes” to reduce emissions, while also giving out tax credits that reward industries that lower emissions.
